Telesp Profits on Vivo Merger - Analyst Blog
July 29 2011 - 11:30AM
Zacks
Brazilian telecom carrier Telecomunicacoes de Sao Paulo
SA (VIV), better known as Telesp, reported second quarter
net income of R$1.1 billion ($0.69 million), up 30% year over year.
Earnings per ADS came in at $1.02 in the reported quarter.
Telesp merged its fixed-line operations with the mobile service
provider Vivo Participacoes in early June. Hence, the second
quarter reflects the combined result.
Telesp, the Brazilian subsidiary of Spanish telecom giant
Telefonica (TEF), reported total revenue of R$8.23
billion ($5.16 billion), up 6.7% year over year. Both mobile and
fixed-line revenues drove the increase.
Consolidated EBITDA rose 9.1% year over year to R$3.06 billion
($1.92 billion) with EBITDA margin increasing 80 bps to 37.2%.
Operating expenses grew 5.4% to R$5.2 billion ($3.2 billion) from
the year-ago quarter.
Revenue Segments
Mobile revenue climbed 13.9% year over
to R$5 billion ($3.1 billion), driven primarily by data revenues
and network usage revenues. Telesp added 2 million customers to
reach 64 million (up 14.4% year over year) subscribers at the end
of the reported quarter. Post-paid and prepaid subscribers grew
25.4% and 11.6% year over year to 14.2 million and 49.8 million,
respectively.
Average revenue per user (ARPU) inched up 0.4% from the year-ago
quarter to R$25.1 ($15.7), owing to subscriber growth as well as
high data and voice services. Churn deteriorated slightly to 2.8%
in the reported quarter from 2.6% in the year-ago quarter.
Fixed revenue increased 8.1% to R$4.2 billion
($2.6 billion) from the year-ago quarter. Pay TV saw the largest
growth of 88% year over year. Other services (up 28.7%), data
transmission (up 15%), Interconnection (up 2.9%) and fixed voice
(up 1.7%) revenues also aided revenue growth.
Total fixed access lines reached 15.28 million at the end of the
second quarter, reflecting a 3.9% year-over-year increase. Telesp
registered 93,000 net additions for its fixed broadband service
(offered under the “Speedy”, “Ajato” and “Fiber” brands), bringing
the total subscriber base to roughly 3.5 million (up 16.8% year
over year).
The Pay TV subscriber base grew 45.5% year over year to 682,000
customers. Fixed voice lost 46,000 customers, touching 11.1 million
at the end of the second quarter.
Liquidity
Telesp exited the quarter with cash and cash equivalents of
R$2.66 billion ($1.67 billion) compared with R$2.36 billion in the
year-ago quarter. Total debt reduced substantially to R$5.7 billion
($3.57 billion) from R$6.6 billion in the year-ago quarter.
Capital expenditure increased 94.6% year over year to R$1.8
billion ($1.13 billion).
Our Analysis
Telesp as a stand-alone entity was struggling to perform so far
as it was significantly challenged by persistent erosion in its
voice telephony business due to stiff competition.
We believe the Vivo integration would bring back the company’s
profitability through its strong mobile service business. The
combined company will now offer bundled (fixed-line and wireless)
services that will improve its competitive position and expand its
opportunities beyond the current expectations. The combined company
expects R$8.2 ($5.3 billion) synergies from the merger that will
start reaping results from the fourth quarter.
We are currently maintaining our long-term Neutral rating on
Telesp. The stock retains a Zacks #3 Rank (Hold) for the short term
(1-3 months).
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